http://www.tdameritrade.com/upto500

and runs through 7/15/2011. The fine print is as follows

Offer valid for one new Individual, Joint or IRA TD Ameritrade account opened by 07/15/11 and funded within 30 days of account opening with $2,000 or more. To receive $100 bonus, account must be funded with $25,000-$99,999 within 30 days of initial minimum funding. To receive $250 bonus, account must be funded with $100,000-$249,999 within 30 days of initial minimum funding. To receive $500 bonus, account must be funded with $250,000 or more within 30 days of initial minimum funding. If you open a new TD Ameritrade retirement account, cash awards are valid within your IRA only and non-transferable to another existing TD Ameritrade account. Please consult a legal or tax advisor for the most recent change to the U.S. tax code and for rollover eligibility rules. Offer is not transferable and not valid with internal transfers, Amerivest-related accounts, TD Ameritrade Institutional accounts, current TD Ameritrade accounts or with other offers. Qualified commission-free Internet equity or option orders must execute within 60 days of meeting minimum funding requirements. Contract, exercise, and assignment fees still apply. Limit one offer per account type. Account must remain open with minimum required funding for 12 months or TD Ameritrade may charge the account for the cost of the cash awarded to the account. TD Ameritrade reserves the right to restrict or revoke this offer at any time. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. Please allow 3-5 business days for any cash deposits to post to account.

Taxes related to TD Ameritrade offers are your responsibility. Retail values totaling $600 or more during the calendar year will be included in your consolidated Form 1099.

Since I already have an existing account with TD Ameritrade, I wanted to check if I can qualify. This is the reply to my inquiry

Yes, you can use that promotion if you open another account.  Please let us know if you need further assistance.  We really appreciate your business.

I opened a new account online. The account application and the credit of bonus went through very smoothly and quickly. The following is the timeline:

• 5/30/11 (Memorial Day) : Submitted application online.
• 5/31/11 : Faxed in signature form and asset transfer request in the morning. Later that day, received an acknowledgment that the asset transfer request was received.
• 6/3/11 : Assets were transferred into the account. The new account was credited with the new account bonus as well as 100 free trades.

From start to receiving the bonus, it took 4 business days. Now I just need to keep the assets there for the next 365 days.

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Notes: Benchmark is changed to 75% Vanguard LifeStrategy Moderate Growth fund and 25% Vanguard Growth Fund (previous weighting was 50/50). This produces the equity/bond ratio of 65/35.

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Notes: Portfolio shift to 8% Timber REITs and 8% MLPs completed. Also, fixed income increased to 35%.

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I spoke to customer service when the rates were first revised and they agreed to grandfather me to the more-friendly rate schedule. This more-friendly rate schedule is still available at their sister brokerage Investrade.com.  The current rate is as follows:

Anyway, I started taking advantage of their low margin rates but in the first quarter, I was hit with a substitute dividend payment in an ETF I was holding in that account. This is the definition of a substitute payment from Fidelity:

Substitute Payments
Substitute payments are payments received in lieu of dividends, interest, or other payments. They may be generated, for example, where a security has been lent to a third party (such as a broker) over a dividend record date. When an investor has a debit balance in a margin account, securities in the account are often eligible to be lent. If the shares are lent over a record date, the investor should receive a substitute payment equal to the amount of the dividend. Although the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) introduced lower federal tax rates for qualified dividend income, substitute payments are not taxed as qualified dividends but are instead taxed as ordinary income. Substitute payments in lieu of dividends and tax exempt interest are reportable in Box 8 of Form 1099-MISC.

So basically, with a substitute dividend payment, you get taxed at the full income tax rate instead of the preferential (15% for most tax payers) qualified dividend tax rate (if the dividend was originally qualified).

The negative consequence of this could be huge. For an ETF like VEA, I could get a year-end dividend in the range of a few thousand dollars. If it gets disqualified, my additional taxes could run into several hundred dollars.

There are a few ways to avoid this

1. Move the assets to a brokerage that “gross-up” the dividends to compensate for the additional taxes you have to pay. I only know of two brokerages that have this voluntary program — Fidelity and TD Ameritrade. As far as I know, VBS (Vanguard) and WellsTrade do not offer this. eOption also does not offer this. Edit: Schwab also offers this voluntary “gross-up” program.
2. Move the assets to the cash position. Some brokerages let you specify the “account type ” of each asset, whether it is “cash” or “margin”. eOption offers this and I moved the assets that potentially produce qualified dividends to “cash”. I left the non-dividend producing assets in “margin”. I don’t believe VBS lets you do this though; all the assets in each account must be the same “type” in VBS.
3. Do not keep a debit balance. If we read Fidelity’s definition carefully, it says that if “an investor has a debit balance in a margin account, securities in the account are often eligible to be lent”. So technically if there is no margin balance, no shares should be loaned out. Personally, I do not regard this method as a fail-safe method. When you sign on the dotted line for a margin account, you are already giving permission to the broker to lend out your shares. It could be possible that the broker will refrain, as far as possible, from lending out your shares in this scenario, but I think there is no guarantee that this would never happen.

Note: FWIW, my experience is that method 3 seems to be true. Until the eOption experience, I have never received a substitute payment with the many margin accounts I have had over the years. The reason could be simply because I have never kept a margin balance except at eOption.

Reference

[1] http://www.fool.com/personal-finance/taxes/2003/12/05/dividend-tax-breaks-at-risk.aspx

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Comments: Portfolio outperforms the benchmark by almost 2%, primarily due to Precious Metal equity and the MLP allocation. At first I thought this was a mistake until I did a rough verification with the following performance information (for June 2010):

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Comment: My portfolio caught up with the benchmark due to the heavy dose of PrecMetal equity, which outperform significantly in the month.

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The following is a list of items to reduce income:

• If you have kids, and you want to help to pay for their college, plan to have more of it funded by 529 accounts. If you have to sell investments or draw down from tax-deferred accounts, that increases your MAGI.
• Pay off mortgage if possible to eliminate income requirement. Again, same thing as college funding, if you have to sell investments or draw down from tax-deferred accounts, that increases your MAGI. Without a mortgage, you have less need to realize capital gains or draw down from tax-deferred accounts.
• Derive income for ongoing expenses from tax exempt bonds (tax exempt income does not figure into MAGI).
• Use a short term tax exempt fund to hold non-immediate cash needs instead of a high yield savings account. Perhaps top up the checking account once or twice a month. This reduces the amount of interest payments reported in MAGI.
• Shift equity investments into lower yield equivalents, while still keeping the general composition of the portfolio reasonably unchanged. One potential candidate would be to invest in US LargeCap Growth instead of US LargeCap Blend. Does not work for US SmallCap (US SmallCap Growth has a poor historical record).
• Invest in rental property and use rental income to fund ongoing expenses (rental income is typically offset by property depreciation).
• Look into MLP investments that shield income for as long as the investment is not sold (you can control when to sell if necessary).
• Delay signing up social security.

Even though it looks like I could potentially benefit from the healthcare reform if I retire early, I don’t agree with the changes. They simply penalize people who are successful and are a disincentive to work. This can’t be good for the economy. But that is another story.

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Comments: Rebalanced into INT EAFE. Moved 1% allocation from US SmallCap to US Timber.

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Comments: PrecMetal equity fell about 12% in January. This contributed to a fall of about 0.5% to the portfolio. International equities, EAFE & EM, both also fell more than domestic stocks. These explained the under performance of the portfolio with respect to the benchmark (-3.23% versus -2.26%).

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Comments: The portfolio gains 1.95% in December.  The overall gain for 2009 is 29.49%. This is commendable considering the 28.2% loss in 2008.

However, when 2008 and 2009 were taken together, the portfolio’s performance is at a value of only (1-28.2%)x(1+29.49%) =0.930, i.e. there is a loss of around 7%.

2008 & 2009 proved to be a very good reminder of the need to stay the course. If an investor were to sell out at the bottom during Feb 2009, (s)he would not be able to participate in the rally starting from Mar 2009.

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Comments: Portfolio made a huge gain of almost 4.5% in the month.

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• 02/2008 : Introduced 100 free trades for PMA package with $25k or more.
• 08/2008 : Eliminated the respectable money market sweep funds and replaced them with a crappy bank account sweep.
• 12/2008 : Eliminated RMMXX, a relatively high yield MMF at that time, for purchase.
• 01/2009 : Close out fee increased from $50 to $75.
• 03/2010 : Close out fee to increase to $95.

In addition, Wells Fargo has been “cracking down” on people who did not actively use the checking account of the PMA package. These accounts are marked as “dormant” and quite a few people reported having to jump through some hoops to re-activate them again.

With the talk of additional tax on big banks, I won’t be surprised to see another round of fee increase on the horizon. The money for the taxes has to come from somewhere.

Wells Trade did have some good points. Their reps are quite friendly and helpful, and the trading system, while nothing fancy, generally works. They also introduce a good online feature, which is the capability to track and specify specific tax lots for trading, very helpful for a taxable account.

Anyway, because of my upcoming Roth conversion, I am done with Wells Trade. I will be contributing $75 to them for the free trades they have given me over the past three years or so when I close out my accounts later this month. Good luck to all those sticking with Wells Trade.

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Comments: Portfolio was on track to gain for the fourth month in a row until the last week of October. In the end, the portfolio had a small loss of 1.66%. Took the opportunity to rebalance out of US LargeCaps and PME into US SmallCaps, US Timber/REITS  and International EAFE equities.

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